Finding cheap shares has become more difficult in recent months, with the FTSE 100 climbing to a record high. As such, investors are faced with a more challenging situation, since the margins of safety on offer are generally lower than they have been in the past. Despite this, there are still a number of stocks trading on low valuations which may prove difficult to justify given their outlooks. Here are two prime examples.
Reporting on Tuesday was diversified financial services company, Just Group(LSE: JUST). Its first half of the financial year shows that the recent merger has had a positive effect on the business. It has delivered growth, while also balancing careful risk selection. In fact, Retirement Income sales were 16% higher on a pro forma basis, while total sales rose by 24% versus the same period of the prior year.
The merger is still expected to deliver significant cost savings and synergies. Already, Just Group is ahead of its original £40m cost synergy target more than a year ahead of schedule, while it is now seeking to increase this amount to in excess of £45m. As well as cost reduction, it is aiming to benefit from a growing market for its products. It anticipates favourable conditions due to demographic changes, individual customer defined benefit transfers and a continued expansion of the open market.
Looking ahead, Just Group is forecast to post a rise in earnings of 21% next year. Despite this high rate of growth, it has a relatively low valuation and trades on a price-to-earnings growth (PEG) ratio of just 0.4. This suggests that there could be upside ahead, with the business well-placed to deliver improving returns in the long run.
Also offering a wide margin of safety at the present time is institutional stockbroker and corporate adviser, Numis (LSE: NUM). The company trades on a price-to-earnings (P/E) ratio of just 11.2, which suggests it offers significant upward re-rating potential.
Of course, the company faces a somewhat uncertain future. The financial services market remains relatively unstable due to the potential impact of Brexit. With a weaker pound, higher inflation and lower confidence in the UK's macroeconomic outlook, it would be unsurprising for investor appetite for new issues and IPOs to be somewhat lower than it otherwise would be. Therefore, Numis is expected to see its profit dip modestly this year.
While the company may have an uncertain near-term future, its long-term potential remains high. It currently yields 5.2% from a dividend which is covered 1.7 times by profit. This suggests there could be scope for a higher dividend, while with rising inflation forecast, the company could become a more enticing income stock. This may increase demand for its shares while they are relatively undervalued and lead to stronger performance over the long run.
Top growth stock
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Peter Stephens owns shares in Numis.